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Thursday, May 29, 2008

WSJ: The Mars-Wrigley Deal and the Mythology of ‘Classic Buffett’

In all the uncertainty in this world, in all the fear and loathing over whether we are or are not in recession, in all the worries about the future of corporate America, there is one concept every American can understand and cling to: “Classic Buffett.”

This easy phrase refers to pretty much any investment made by Warren Buffett, the Oracle of Omaha. His mystical power to make good investment decisions has caused some observers to label as “Classic Buffett” even deals that no one would have predicted before. No matter how unexpected the deal he does, no matter how unusual the structure, the minute Berkshire Hathaway’s fingerprint appears on a deal, it is ‘Classic Buffett.’

This has applied to moves as wide-ranging as the launch of Berkshire Hathaway Assurance for the municipal bond business–even though the original entry into the insurance business was only arguably Classic Buffett–to the acquisition of the Pritzker family’s Marmon holdings in a two-step deal, and to today’s acquisition of Wm. Wrigley Jr., in which Buffett is joining with acquirer Mars and committing $4.4 billion of subordinated debt financing. The Wrigley deal, which includes a household name as familiar as Buffett’s beloved Coca-Cola, looks like Classic Buffett because it is an item you see in stores, which reinforces Buffett’s avoidance of schmancy, hard-to-grasp concepts.

So what is Classic Buffett, exactly? According to different commentators, it includes scooping up an industry-leading company when the time and price are right; acquiring a boring firm with stable earnings; expanding his dominance; and exploiting Berkshire’s sterling financial position to take advantage of a market breakdown.

They all sound pretty much like good merger strategies.

But perhaps one of the best guides to Classic Buffett came from the man himself, when he wrote in a shareholder letter that one his rules was to was be fearful when others are greedy, and be greedy when others are fearful. Classic Buffett, it seems, is not too conventional or classic at all.

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WSJ:Anheuser-Busch-InBev: Will Warren Buffett Support A Deal?

Stephen Grocer, May 28, 2008, 8:30 am

InBev’s road to St. Louis might include a detour through Omaha.

Omaha is, of course, the Nebraska headquarters of Berkshire Hathaway and Warren Buffett. With almost 5% stake, Berkshire is the second largest shareholder in the iconic American brewer. And for InBev, of Belgium, to succeed in its efforts to combine with Anheuser-Busch, Buffett’s support seems crucial.

Associated Press

Throughout his career, Buffett has played the role both of corporate protector and deal facilitator. For Anheuser’s top brass–which deeply opposes a deal–having Buffett in their corner would go far in beating back activist investors. These investors recently bought into A-B, presumably with the idea of pressuring for a sale. Buffett’s stake, combined with the Busch family’s stake, would mean roughly 9% of the brewer’s shares were opposed to a deal. Buffett hasn’t made his views public yet.

All of that doesn’t mean Berkshire will stymie activist investors or won’t support a sale. In the past few years, some of Berkshire investments have faced activist campaigns that Berkshire didn’t oppose — at least publicly — according to FactSet SharkWatch. Berkshire was invested in Home Depot when Relational Investor’s called for the company to evaluate its strategic direction. More recently, Berkshire was increasing its share in Kraft at the same time Nelson Peltz was pushing Kraft to sell its Post and Maxwell House brands.

Buffett has, in fact, often been a facilitator of deals. For instance, there was the acquisition of ABC by Capital Cities in 1985, as well as Gillette’s sale to Procter & Gamble two decades later.

There is perhaps no better example of Buffett’s dual role of corporate protector and facilitator than Gillette. He acquired $600 million in preferred stock convertible to an 11% stake in the company in 1989. Back then Gillette had just fought off two hostile takeover attempts and Buffett’s investment was interpreted as a measure to protect the razor maker from future approaches. Buffett even wrote at one point in his annual letter to shareholders: “As owners of, say, Coca-Cola or Gillette shares, we think of Berkshire as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term progress of the companies rather than by the month-to-month movements of their stocks.” Yet 16 years after that investment, he played a crucial role in Gillette’s sale to P&G, calling it a “dream deal.” He even agreed to buy more shares in Gillette before the deal closed.

One can hardly ignore the similarities between the P&G-Gillette deal and a tie-up of InBev and Anheuser-Busch, in which he began building up his stake in A-B in late 2004. Like P&G and Gillette, the two brewers have some of the strongest brands in the world, and the combined company “would become number one or two in the most populous regions in the world (except Africa),” writes analyst Marc Leemans at Degroof. (It should also be noted that Buffett served on Gillette’s board with Jorge Paulo Lemann, one of InBev’s chief shareholders.)

Seems like such a deal might be Classic Buffett.

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Wednesday, May 28, 2008

Warren Buffett partnership letter of 1965

July 8, 1964

First Half Performance

The whole family is leaving for California on June 23rd so I am fudging a bit on this report and writing it June 18th. However, for those of you who set your watches by the receipt of our letters, I will maintain our usual chronological symmetry in reporting, leaving a few blanks which Bill will fill in after the final June 30th figures are available.

During the first half of 1964 the Dow-Jones Industrial Average .(hereinafter called the “Dow”) advanced from 762. 95 to 831. 50. If one had owned the Dow during this period, dividends of approximately 14.40 would have been received, bringing the overall return from the Dow during the first half to plus 10. 9%. As I write this on June 18th, it appears that our results will differ only insignificantly from those of the Dow. I would feel much better reporting to you that the Dow had broken even, and we had been plus 5%, or better still, that the Dow had been minus 10%, and we had broken even. I have always pointed out, however, that gaining an edge on the Dow is more difficult for us in advancing markets than in static or declining ones.

To bring the record up to date, the following summarizes the performance of the Dow, the performance of the Partnership before allocation to the general partner and the limited partners’ results:

Overall Results Partnership Limited Partners’

Year From Dow (1) Results (2) Results (3)

1957 - 8.4% +10.4% + 9.3%
1958 +38.5 +40.9 +32.2
1959 +20.0 +25.9 +20.9
1960 - 6.2 +22.8 +18.6
1961 +22.4 +45.9 +35.9
1962 - 7.6 +13.9 +11.9
1963 +20.6 +38.7 +30.5
1st half 1964 +.10.9 +12.0 +10.5
Cumulative results +116.1 +521.0 +354.4
Annual compounded rate 10.8 27.6 22.2
(See next page for footnotes to table.)

Footnotes to preceding table:

(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through ownership of the Dow during that year. The table includes all complete years of partnership activity.

(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout the entire year after all expenses but before distributions to partners or allocations to the general partner. (3) For 195?-61 computed on the basis of the preceding column of partnership results allowing for allocation to the general partner based upon the present partnership agreement, but before monthly withdrawals by limited partners.

Buying activities during the first half were quite satisfactory. This is of particular satisfaction to me since I consider the buying end to be about 90% of this business. Our General category now includes three companies where B. P. L. is the largest single stockholder. These stocks have been bought and are continuing to be bought at prices considerably below their value to a private owner. We have been buying one of these situations for approximately eighteen months and both of the others for about a year.

It would not surprise me if we continue to do nothing but patiently buy these securities week after week for at least another year, and perhaps even two years or more. What we really like to see in situations like the three mentioned above is a condition where the, company is making substantial progress in terms of improving earnings, increasing asset values, etc. , but where the market price of the stock is doing very little while we continue to acquire it. This doesn’t do much for our short-term performance, particularly relative to a rising market, but it is a comfortable and logical producer of longer-term profits. Such activity should usually result in either appreciation of market prices from external factors or the acquisition by us of a controlling position in a business at a bargain price. Either alternative suits me.

It is important to realize, however, that most of our holdings in the General category continue to be securities which we believe to be considerably undervalued, but where there is not the slightest possibility that we could have a controlling position. We expect the market to justify our analyses of such situations in a reasonable period of time, but we do not have the two strings to our bow mentioned in the: above paragraph working for us in these securities.

Investment Companies

We regularly compare our results with the two largest open-end investment companies (mutual funds) that follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed-end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri-Continental Corp., and Lehman Corp., manage over $4 billion and are probably typical of most of the $28 billion investment company industry. Their results are shown below. My opinion is that this performance roughly parallels that of the overwhelming majority of other investment advisory organizations which handle, in aggregate, vastly greater sums.

Mass. Inv. Investors Limited

Yr. Trust (1) Stock (1) Lehman (2) Tri-Cont. (2) Dow Partners
57 -11.4% -12.4% -11.4% - 2.4% - 8.4% + 9.x
58 +42.7 +47.5 +40.8 +33.2 +38.5 +32.x
,59 + 9.0 +10.3 + 8.1 + 8.4 +20.0 +20.x
60 - 1.0 - 0.6 + 2.5 + 2.8 - 6.2 +18.x
61 +25.6 +24.9 +23.6 +22.5 +22.4 +35.x
62 - 9.8 -13.4 -14.4 -10.0 - 7.6 +11.x
63 +20.0 +16.5 +23.7 +18.3 +20.6 +30.x

lst half 1964
+11.0 + 9.5 + 9.6 + 8.6 +10.9 +10.x
cumulative results
+105.8 +95.5 +98.2 +105.1 +116.1 +354.x
Annual compounded rate
10. 1 9.4 9.6 10.1 10.8 22.x

(1) Computed from changes in asset value plus any distributions to holders record during year.

(2) From 1964 Moody’s Bank & Finance Manual for 1957-63. Estimated for first half 1964.
VANCE\d6These figures continue to show that the most highly paid and respected investment management has difficulty matching the performance of an unmanaged index of blue chip stocks.

The results of these companies in some ways resemble the activity of a duck sitting on a pond.
When the water (the market) rises, the duck rises; when it falls, back goes the duck. SPCA or no SPCA, I think the duck can only take the credit (or blame) for his own activities. The rise and fall of the lake is hardly something for him to quack about. The water level has been of great importance to B. P. L’s. performance as the table on page one indicates. However, we have also occasionally flapped our wings.

I would like to emphasize that I am not saying that the Dow is the only way of measuring investment performance in common stocks. However, I do say that all investment managements (including self-management) should be subjected to objective tests, and that the standards should be selected a priori rather than conveniently chosen retrospectively.

The management of money is big business. Investment managers place great stress on evaluating company managements in the auto industry, steel industry, chemical industry, etc. These evaluations take enormous amounts of work, are usually delivered with great solemnity, and are devoted to finding out which companies are well managed and which companies have management weaknesses. After devoting strenuous efforts to objectively measuring the managements of portfolio companies, it seems strange indeed that similar examination is not applied to the portfolio managers themselves. We feel it is essential that investors and investment managements establish standards of performance and, regularly and objectively, study their own results just as carefully as they study their investments.

We will regularly follow this policy wherever it may lead. It is perhaps too obvious to say that our policy of measuring performance in no way guarantees good results—it merely guarantees objective evaluation. I want to stress the points mentioned in the “Ground Rules” regarding application of the standard—namely that it should be applied on at least a three-year basis because of the nature of our operation and also that during a speculative boom we may lag the field. However, one thing I can promise you. We started out with a 36-inch yardstick and we’ll keep it that way. If we don’t measure up, we won’t change yardsticks. In my opinion, the entire field of investment management, involving hundreds of billions of dollars, would be more satisfactorily conducted if everyone had a good yardstick for measurement of ability and sensibly applied it. This is regularly done by most people in the conduct of their own business when evaluating markets, people, machines, methods, etc., and money management is the largest business in the world.


We entered 1964 with net unrealized gains of $2, 991,090 which is all attributable to partners belonging during 1963. Through June 30th we have realized capital gains of $2, 826, 248. 76 (of which 96% are long term) so it appears very likely that at least all the unrealized appreciation attributable to your interest and reported to you in our letter of January 25, 1964, (item 3) will be realized this year. I again want to emphasize that this has nothing to do with how we are doing. It is possible that I could have made the above statement, and the market value of your B. P. L. interest could have shrunk substantially since January 1st, so the fact that we have large realized gains is no cause for exultation. Similarly when our realized gains are very small there is not necessarily any reason to be discouraged. We do not play any games to either accelerate or defer taxes. We make investment decisions based on our evaluation of the most profitable combination of probabilities. If this means paying taxes—fine-I’m glad the rates on long-term capital gains are as low as they are.

As previously stated in our most recent tax letter of April 1, 1964, the safe course to follow on interim estimates is to pay the same estimated tax for 1964 as your actual tax was for 1963. There can be no penalties if you follow this procedure.

The tax liability for partners who entered January 1st will, of course, be quite moderate, as it always is in the first year for any partner. This occurs because realized capital gains are first attributed to old partners having an interest in unrealized appreciation. This, again, of course, has nothing to do with economic performance. All limited partners, new and old, (except for Bill Scott, Ruth Scott and Susan Buffett per paragraph five of the Partnership Agreement) end up with exactly the same results. As usual, net ordinary income for all partners is nominal to date.

As in past years, we will have a letter out about November 1st (to partners and those who have indicated an interest to us by that time in becoming partners) with the amendment to the Partnership Agreement, Commitment Letter for 1965, estimate of the 1964 tax situation, etc. In the meantime, keep Bill busy this summer clearing up anything in this letter that comes out fuzzy.

Warren E. Buffett

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SPIEGEL: Interview with Warren Buffett 28/5/08


US billionaire Warren Buffett talks to SPIEGEL about the consequences of the current financial crisis, his definition of true luxury and why he has suddenly developed an interest in German companies.

Looking to the future? Warren Buffet has set his sights set on acquiring German companies.

Looking to the future? Warren Buffet has set his sights set on acquiring German companies.

SPIEGEL: Real estate prices have plunged rapidly in the United States, energy is getting more expensive by the day, the financial sector is in a miserable condition and new risks are lurking everywhere. Can the United States even avert a recession anymore?

Warren Buffett: Well, I'm not an expert on the economy. I couldn't make any money predicting the course of the economy for six months or a year. But I do believe that we are already in a recession. Maybe not according to the economists' definition. That would require two consecutive quarters of negative growth. We haven't reached that point yet. But people are already feeling the effects of the recession. It will be deeper and last longer than many believe. But my business models aren't based on current forecasts. In fact, they are completely independent of forecasts. Even if the world went under, I would still be buying companies.

SPIEGEL: But you yourself have said that the party is over.

Buffett: Yes, but I was just talking about the insurance sector. For decades, it was possible to make relatively good money in insurance. But those days are now gone.

SPIEGEL: What about the financial industry?

Buffett: The party is never over there. Sure, there will always be new upheavals. We are now experiencing one of those upheavals, as evidenced by the near-collapse of investment bank Bear Stearns. But this sort of thing also presents huge new opportunities for investments, even if this is happening in a chaotic period.

SPIEGEL: Suddenly so optimistic? You yourself have referred to some of the tools of the financial industry as "weapons of mass destruction." It sounds almost like what German President Horst Köhler said about the financial markets, which he described as "a monster."

Buffett: I don't condemn the entire industry. When I mentioned weapons of mass destruction, I was merely referring to the out-of-control trading in derivatives. It doesn't make sense that hundreds of jobs are being eliminated, that entire branches of industry in the real economy are going under because of such financial gambles, even though they are in fact completely healthy. Besides, these types of constructs are so complicated that hardly anyone understands them anymore.

SPIEGEL: Even bankers don't know what's going on anymore.

Buffett: They concocted a poisonous brew, and in the end they had to drink it themselves. This is something bankers are normally extremely loath to do. They'd rather sell it to someone else.

SPIEGEL: How can these financial instruments be monitored?

Buffett: That's the problem. You can no longer control or regulate this sort of thing. It's taken on a life of its own. You can't put the genie back into the bottle. The American central bank, the Fed, tried to exert its influence by lowering interest rates, for example. The Fed and the US government have absolutely no interest in promoting the extreme fluctuations we are now experiencing. Nevertheless, they were also unable to prevent them.

SPIEGEL: Based on your logic, any future US administration will also be powerless. Who would you like to see as the next president?

Buffett: Before they launched their candidacies, I told the two current Democratic candidates: I support you. I have donated the maximum amount of money allowed by law to the Democrats, and I've spent the same amount of money to support both Barack Obama and Hillary Clinton. But that's like being married to two people. You have to make a decision at some point. I chose Obama, and I hope that he wins.


Buffett: I just happen to agree with many of his views, starting with his modern proposals for abortion and reproduction policy and ending with the fiscal policy he envisions.

SPIEGEL: You've come to Germany to invest in family-owned companies. What do you find so attractive here?

Buffett: We are looking for large, well-run companies that we understand right away. The one condition is that they have grown over several decades. Companies that are three or four years old are out of the question. Of course, many families will not be interested in selling such attractive companies. I understand that completely. But sometimes there is a good reason to sell the company, after all. When that happens, we want the families to think of us first.

SPIEGEL: Who is on your shopping list?

Buffett: I don't have a specific shopping list. I'm looking for companies with a long-term, permanent competitive advantage, companies that are managed by good people and that are good value. We have only 19 people at Berkshire in Omaha, which is why we need good local managers. I can think of a number of companies in Germany that would interest us. But as an outsider, I can't say when the circumstances are right for a sale. That's why these people should call me directly.

SPIEGEL: Whose call would you welcome in particular?

Buffett: It wouldn't be good for me or the companies if I told you their names.

SPIEGEL: The German economy is in a highly robust state at the moment, while a few other Western countries are having economic problems. How do you account for this?

Buffett: It shows that the Germans know something about business. In fact, the strong euro works against Germany. But if an exporting nation like Germany is still strong, it proves that the supply and quality are right. And that many correct decisions were made in the past and that reform efforts were worthwhile.

SPIEGEL: In addition to companies like Coca-Cola and Procter & Gamble, you have invested many billions of dollars in reinsurance companies. Now insurance premiums are falling. Did you make a mistake?

Buffett: I have been in the business since 1970, and it's always gone up and down. Perhaps I won't make quite as much money in the next 12 months, but overall I believe that the industry is in good shape, despite the current slump. When we buy something, we stay forever and forever. Many find this irritating, but that's just the way we are.

SPIEGEL: Munich Re was the first German company in which you invested directly. Another investment for posterity?

Buffett: We have two different categories at Berkshire Hathaway. There are 76 companies that we own permanently. And then there is a trading inventory. Munich Re is part of the second category.

SPIEGEL: Have you met with the executives at Munich Re?

Buffett: Yes, two years ago. We also bought shares in another German company…

SPIEGEL: Which company?

Buffett: I'd rather not say. Those shares are also part of our trading inventory and can be quickly sold again.

SPIEGEL: You have pledged about half of your fortune to the Bill & Melinda Gates Foundation. What happens with the other half?

Buffett: In addition to the Gates Foundation, I have pledged money to four other foundations. So far, 80 percent of my stock holdings have been firmly committed to these five organizations. I have promised that I would ultimately donate every one of my shares in Berkshire Hathaway. My will clearly specifies what will happen to the remaining shares. But I can still change this decision while I'm alive.

SPIEGEL: You are the richest man in the world…

Buffett: … maybe not anymore…

SPIEGEL: Let's not argue about a few billion. How does your immense wealth affect your everyday life?

Buffett: I have everything I need. But that's also the way I felt at 25, when I didn't have that much money yet. I have a wonderful family. I have a job that I love and wonderful people who help me with it. It can't get any better than that.

SPIEGEL: What's your take on the new class of the super-rich, such as the many Russian oligarchs who ostentatiously show off their wealth?

Buffett: Well, if it makes them happy… It doesn't do anything for me. I'm happy when I can spend every day doing the things that I like to do. That's my luxury. Things could have gone differently, but I was lucky.

SPIEGEL: You have no interest in a new mansion in Omaha, or perhaps a luxury house at the beach? After all, you've been living in the same house for decades.

Buffett: I don't need 15 houses. Owning real estate doesn't mean much to me. I don't like to think about things like that. I don't need 12 boats, or even the world's largest boat with a crew of 80. I'd have to take care of them, to worry about them. I get a lot more fun out of life without all the bells and whistles.

Interview conducted by Christoph Pauly and Janko Tietz

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CNBC: The 3 "Bedrock" Ideas Behind Warren Buffett's Billions

Warren Buffett's Bedrock
During his European tour last week, Warren Buffett held four news conferences in four days and answered a lot of questions.

While a few of his answers generated headlines, most did not.

There was, however, one answer in Madrid that stood out to me as I listened to all those questions and answers in a variety of languages.

It's not new, so it's not news. But this one, brief, answer is essential to understanding how Warren Buffett has been so incredibly successful with his investments over the decades.

Buffett was asked to name the most important lesson he learned from his mentor, Benjamin Graham.

Instead he listed three, using just 85 seconds to deftly describe the trio of "bedrock" ideas that have helped make him the world's richest man.

It all comes from this ....

Warren Buffett: The three most important lessons I learned were all from the same book, The Intelligent Investor. It was written first by (Benjamin) Graham in 1949. They appear in chapters 8 and chapters 20.

The first is, to look at stocks as pieces of businesses, not as little items on a chart that move around, not as ticker symbols, not as something that might split next week or next month or something of the sort. But, rather, to look at the business, value the business, divide by the shares outstanding, and decide whether you really want to own a piece of that business at that price.

The second one was his commentary about your attitude toward the stock market. That it is there to serve you rather than to instruct you, and he used the famous Mr. Market example of that. That attitude is fundamental to making money in stocks over time.

And the final item he talked about was margin of safety. When you buy a stock that you think is worth 10 dollars, you don't pay $9.95 for it, because you can't be that precise in estimating its value. So you leave a considerable margin of safety for both what you don't understand and for the vagueries of the future.

And those three ideas, which I learned when I was 19 years old, have been the bedrock of everything I've done since.

Current Berkshire price:

Berkshire Hathaway Inc

125900.0 1930.00 +1.56%

[US;BRK.A 125900.0 1930.00 (+1.56%) ]

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MONEYNEWS:Buffett: U.S. on Right Track Long-Term

Tuesday, May 27, 2008 11:56 AM

As dark as things might look now, the U.S. is on the right track long-term, says billionaire investor Warren Buffett.

"My children will live better than I did, and my grandchildren even better," says the world's third-richest man and its most famous investor in an hour-long interview recently on CNBC.

"In the 20th century, the real standard of living in the United States went up seven for one. A great many of the factors that went into producing that really unprecedented gain in how people live ... are still present.

"We have a market system, we have a meritocracy, we have the rule of law.

None of them are perfect, but they have combined in the past to move one generation after another ahead of the one that preceded them. That will continue to be the case."

Buffett warned, however, to expect markets to do the unexpected.

"Markets will do very wild and unpredictable things, and you will see things that you haven't seen before."

Responding to questions from reporters and e-mails from viewers, Buffett answered in his typically simple, blunt and occasionally humorous style.

Asked if the current economy is similar to the down economy of 1973-74, Buffett summed up the situation succinctly.

"It's nothing like 73-74 yet, but that doesn't mean it couldn't be," he says.

"In 1973-74, we had stagflation, we had a meltdown in equity prices, really good companies got down to three and four times earnings, and they weren't phony earnings. Nothing like that's happening [now].

"We're seeing more fixed-income-type forced liquidations. We're seeing more indigestion at banks with a lot of loans they don't want to have. So [it's] ... a time of easy money in terms of price, but not so easy in terms of availability."

Although officially the U.S. is not yet in a recession popularly defined as two consecutive quarters of negative GDP growth . Buffett disagrees.

"By any common sense definition we are in a recession," he says.

"On balance, most people's net worth has been heading south. If you own a house and have an 80 percent mortgage on it and had 20 percent equity, you may not have any equity. Millions of people are in situations somewhat similar to that."

People who own municipal bonds have been similarly hurt, says Buffett, as yields have declined.

Retailing and business in general have also slowed significantly across the board, he observed, citing sales figures from Berkshire Hathaway holdings that come in daily.

Asked if the economy will turn around quickly and how long will this slump last, Buffett declined to make any predictions.

"We don't try to time anything or predict," he says. "We just look for where there's good values and if we find them, we buy them. Nobody knows what the economy is going to look like a year or two years from now."

Current conditions may lead to something more severe, he says, or if we're lucky, it won't.

"I've never made any money on economic forecasting," says Buffett. "I made money by staying out of trouble."